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China And Brazil Intrigue Against The Dollar

China is unwilling to continue to finance American military might. China is the dragon. Soon fire shall issue forth from its mouth.

[Policing Wall Street]

Whither the dollar?

Who knows? Yes, down. As the United States revs up its printing presses, it runs the danger of becoming the Zimbabwe of the West.

China, which holds approximately $2 trillion in foreign reserves –of which more $1 trillion is in United States dollars—is becoming nervous. Those dollars are slowly being devalued, and American interest rates are too low to offset the devaluation.

Yesterday the Financial Times reported that China and Brazil plan to use their respective currencies in bilateral trade transactions. According to the FT, Brazil’s President Lula da Silva and Chinese President Hu Jintao, “first discussed the idea of replacing the dollar with the renminbi and the real as trade currencies when they met at the G20 summit in London last month.”

Recently China also agreed to a currency swap with several other countries; its main trading partners include South Korea, Hong Kong, Indonesia, and most recently Argentina.

Currency swaps are an agreement to exchange a principal amount of a currency --Chinese renminbi in this case— into that of another currency –Argentine peso— at a fixed interest rate over a fixed period of time.

This is similar to the reign of fixed exchange rates; which stabilized the world economy after World War II.

The United States has long used its position as the world’s dominant military power to ensure that countries accept the dollar, even as the United States worked to devalue the dollar.

No, it is not because the United States would invade Germany and Japan. Au contraire; it is precisely because no country wants Germany and Japan to rearm, or to acquire nuclear weapons. So many countries view the dollar as an insurance premium to avoid a catastrophic war.

But China does not fall under the American nuclear umbrella.

Actually our nuclear tipped missiles are aimed at China. In reality China is financing those very same missiles that are aimed at China. That must be unnerving to the Chinese people.

Inexplicably the American people never even consider the absurd weakness of the dollar from China’s perspective- namely, Why should China subsidize the American military?

The United States desperately wants for the Chinese renminbi to appreciate, so that the dollar depreciates.

Let’s examine the dangers of a dollar depreciation relative to the renminbi.

China holds $1 trillion of American money. If the renminbi were to appreciate 30%, China would not be holding $1 trillion of American dollars as expressed in renminbi; it would be holding the equivalent of $700 billion of renminbi.

Example: At 10 renminbi to the dollar. $1trillion= 10 trillion renminbi. At 7 renminbi to the dollar. $1 trillion= 7 trillion renminbi. Thus China would have a differential of 3 trillion renminbi.

The United States is keeping interest rates low. With the Treasury five year note yielding 2.04%, China is truly financing the American way of debt.

Yes, American debt has enabled China to produce goods at a cheap price and Americans have willingly purchased those goods. But China is not like Japan, which faced the same dilemma years ago, and was willing to finance American extravagance.

China is unwilling to continue to finance American military might. China is the dragon. Soon fire shall issue forth from its mouth.

Brazil’s da Silva has grown weary of American backing of right-wing governments which accommodate the power of the United States.

He seeks to establish a new world order; with Brazil, the most powerful economy in South America, gaining hegemony over the United States in South America. Brazil wants to be a first among equals of the countries of Venezuela, Bolivia, Ecuador and other South American countries.

Let us look today at the Brazilian Real. The dollar declined approximately 1% against the Brazilian Real.

Yesterday if Brazil had invested its surplus dollars in two year notes at a yield of 0.88%, Brazil would have lost .12% of the total sum invested. 1.00% decline in the dollar- 0.88% yield on a two year Treasury note= 0.12% loss.

Today if Brazil had invested its surplus dollars in two year notes at a yield of 0.82%, Brazil would have lost 0.18% of the total sum invested. 1.00% decline in the dollar- 0.82%= 0.18% loss.

Notice how the interest rate on the US two year note has declined by 0.06% in one day. That is because the Federal Reserve has made a decision to keep interest rates low- as today’s release of the notes of the April 28 and 29 2009 joint meeting of the Federal Reserve Board of Governors and the Federal OpenMarket Committee shows.

Americans never truly understand the absurdity of the world financing American debt.

America, like the Greeks, boasts that it saved the world for democracy. But Athens did not permit democracy in the city-states that it conquered. Athens democracy was built on castration and slavery.

So too the world is paying the costs for democracy. But whose democracy? The democracy of the rich.